Question

A serial bond issue of $10,000 is offered on May 1, 2015 paying 6% annually. Face value of the bonds is $400 each and matures in 4 years. Prepare a complete redemption schedule for this issue (round to nearest dollar). Show appropriate column sums to verify results.

What would an investor pay if they planned to buy one of these bonds on May 1, 2017, seeking an 8% return on investment?

What would be the price on October 1, 2017?

Answer 1

NOTE: Redemption Schedule has been prepared by assuming the YTM to be 8% per annum (which is the investor's required rate of return).

(a)

(b) On May1, 2017 the bond's market price would be equal to the summed present value of its remaining redemption cash flows.

Therefore, Bond Market Price = 24 / 1.08 + 424 / (1.08)^(2) = $ 385.73 approximately.

(c) Bond Price on 1st October, 2017 = 24 / (1.08)^{1-(5/12)} + 424 / (1.08)^{2-(5/12)} = $ 398.304 approximately